If closing stock is omitted from the calculation of profit, what is the likely effect?
Correct answer: C. Gross profit is understated
- A. Gross profit is overstated
- B. Liabilities are overstated
- C. Gross profit is understated
- D. Sales are understated
Explanation
Closing stock is deducted when calculating cost of goods sold. If it is omitted, cost of goods sold is overstated and the resulting gross profit is understated.
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About Incomplete Records
Incomplete records require profit and financial position to be reconstructed when a complete double-entry system is unavailable. Methods include statements of affairs, capital comparisons, control accounts, cash summaries and margin calculations to find missing sales, purchases, expenses, assets, liabilities and drawings, while distinguishing business profit from changes in capital.
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